Medibank Private Ltd (ASX: MPL) shares have gone through some pain over the past year as the company deals with the fallout of a major cyber attack in 2022.
The question is: Is this a healthy investment opportunity or an ASX stock to steer clear of?
The private health insurance company has three main earnings drivers – its insurance revenue, the claims, and the investment performance of its portfolio, where the premiums are invested.
Let's look at each area.
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Revenue potential
Medibank expects "further moderation in resident industry growth in FY24 relative to FY23" and aims to achieve total resident policyholder growth in FY24 of between 1.5% to 2%.
At its annual general meeting (AGM) in November, the company reported resident industry growth was in line with expectations, and the market remained "competitive".
Net resident growth year to date as of 31 October 2023 was 0.3%, with 5,200 policyholders added, including the impact of the June 2023 premium review.
While growth is slowing, it appears revenue can rise in 2024, which is useful for Medibank Bank shares.
Claims and other costs
The ASX healthcare share said at the time of the FY23 result, it expected underlying claims per policy unit growth of 2.6% for FY24 among resident policyholders.
There has been a recovery in surgical claims whilst trends in non-surgical remain "below underlying expectations". It did say a softness in discretionary extras modalities was "starting to materialise".
Medibank also said it was targeting $20 million of productivity savings in private health management expenses across FY24 and FY25. At the AGM, it said it was "on track" for FY24.
It was expecting cybercrime costs of between $30 million and $35 million in FY24 for a further IT security uplift, and legal and other costs related to regulatory investigations and litigation. However, that expenditure excludes the impact of any "potential findings or outcomes from regulatory investigations or litigation."
Investment portfolio
Medibank can't predict what investment markets are going to do, but higher interest rates saw the business generate $139 million of net investment income in FY23, compared to a loss of $25 million in FY22.
In FY23, there was a $78.6 million benefit from the higher RBA cash rate, while a 4.10% RBA rate was expected to add a further $20 million benefit in FY24.
Medibank share price valuation
Based on UBS' estimates for the company, the Medibank share price is valued at 18x FY24's estimated earnings. The broker calls it a buy, with a price target of $4.30, which says UBS thinks the Medibank share price could go up 20% over the next year.
It is also projected to pay a dividend per share of 17 cents, which would be a grossed-up dividend yield of 6.8%.
